Written by Jim Welsh
Macro Tides Weekly Technical Review 14 September 2020
One Down, One to Go
In the September 4 WTR the level of call option activity was reviewed, which showed how the stock market had been influenced in recent months by excessive call buying in the big name Mega Cap stocks.
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This frenzy was driven by a buy-the-dip mentality that was not eliminated by the recent correction that resulted in a -7.7% drop in the S&P 500, -12.0% fall in the Nasdaq 100, and a -7.4% decline in the Russell 2000 between September 2 and September 11. The call buying addiction may have been tempered by this sharp drop, but it will take a larger decline to provide the market lesson the neophyte traders need to earn their first degree of many in stock trading.
From its high on September 2 the S&P 500 fell 278 points from 3588 to 3310. A 50% retracement would allow the S&P 500 to rally to 3445 and a push up to 3480 – 3500 if it retraced 61.8% of the drop. The market is likely to get support this week from the Federal Reserve on Wednesday when Chair Powell emphasizes that the Fed is committed to providing whatever support the economy needs. He will likely take the opportunity in his post meeting press conference to reiterate that the economy could use additional stimulus from Congress.
I have been surprised and disappointed by the lack of progress by Congress to provide more support for unemployed workers and small businesses. Clearly, both parties believe that doing nothing will garner votes from their base. While that may be true, members of Congress are failing to honor their primary duty – doing what’s best for the country.
After weeks of improvement the number of people filing for unemployment benefits has been holding firm, as 884,000 initial claims were filed last week unchanged from the prior week. Under the Pandemic Unemployment Assistance program the number of claims rose to 839,000 from 748,000. In total 29.6 million people were receiving some form of unemployment benefit, while 13.38 million were receiving ongoing state unemployment benefits.
The labor market is weaker than the state unemployment benefit figures suggest. The improvement in the labor market has stalled since July 31 and consumer spending has likely followed suit. The national average weekly unemployment check has dropped from $900 at the end of July to $306, and most consumers can’t survive on that. Even though Congress will make any additional assistance retroactive to July 31, the slowdown in consumer spending will weigh on the economy and especially on small businesses.
In median income zip codes small business revenue was down -17.9% from January as of August 9. In contrast small business revenue for low income zip codes was off by -14.6%, while small businesses in high income zip codes experienced a larger decline of -23.3%.
This may seem counter intuitive but consumers in lower income areas spend a greater proportion of their income on necessities and are less able to save.
While the S&P 500 is likely to rally more in the short term, the expectation that it will fall to 3200 has not changed. The Call / Put ratio turned down but it is still way above what would normally be called excessively high. The lower skinny red horizontal line is at 1.25 which indicates that the 10-day average is 125 calls for every 100 puts. When the S&P 500 peaked on September 2 the 10 day average was the highest in the past 20 years at 1.94 and has only fallen to 1.56. The Call/Put ratio is likely to drop more if the S&P 500 declines again after a near term bounce. This is one reason a decline to 3000 can’t be dismissed since it would take a larger drop to get the Call/Put ratio anywhere near the green horizontal line at 1.0.
After the -7.7% quick drop in the S&P 500 in 6 trading days, the 21 day average of Advances minus Declines fell below 0, as noted by the blue arrows. In the past year the S&P 500 has posted a trading low whenever this Oscillator has fallen below 0. In addition, the S&P 500 tested the trend line connecting the June and July high near 3325, so this was another reason why the S&P 500 was likely to rebound. However, the decline to 3310 on September 11 indicates weakness since the S&P 500 fell below the initial trading low at 3355 and 3329 which were tested before giving way. If the S&P 500 had held 3355 it would have indicated more underlying strength.
The 21 day average of Advances minus Declines fell for Nasdaq issues fell to -300 on September 11 as noted by the green arrows. Other than during the Pandemic selloff in March, the Nasdaq 100 has rallied each time the 21 day average of Advances minus Declines fell to the green line. In addition the Nasdaq 100 tested 11,000 and held on September 11, so a rebound from this support is natural.
After the Nasdaq 100 recorded a new all time high on September 2 it fell -11.1% in just 3 trading days. This is the largest drop in such a short period of time for the Nasdaq 100. Since 2000 there have been only 5 prior occasions where the Nasdaq 100 posted a new high and then dropped by at least -8.0%. Here are the dates illustrated on the charts of the Nasdaq 100 below, 2/25/20, 11/9/07, 3/30/00, 3/15/00, and 1/06/00.
The initial reversal on January 7, 2000 occurred after the Nasdaq 100 had made a new high and its RSI confirmed the new high. The second and third reversals lower followed new highs that were not confirmed by the Nasdaq 100’s RSI and were thus more legit. After the January 30, 2000 reversal the Nasdaq 100 dropped -31.7% by May 24 less than 2 months after the signal.
After the reversal signal on November 9, 2007 the Nasdaq 100 rebounded and held up until December 26. By March 17, 2008 though, the Nasdaq 100 was down -17.9% from its close on November 9, 2007.
The reversal signal on September 8, 2020 followed a new high that was confirmed by the Nasdaq 100’s RSI, so a more pronounced rebound can’t be ruled out (below). The Nasdaq 100 closed well below the uptrend line for the first time since the March trading low on September 8. It would be classic for the Nasdaq 100 to rally up to and touch the underside of the rising trend line which is near 11,750, and about a 53% retracement of the drop. As long as the Nasdaq 100 remains below the rising trend line the intermediate trend is down.
The Nasdaq 100’s weekly RSI is more negative and has traced out a pattern that looks very similar to what unfolded in 2018. When the Nasdaq 100 topped in January 2018 the weekly RSI confirmed the new high. When the Nasdaq 100 subsequently rose to a higher high in September, the weekly RSI was well below its January level. The pattern is being repeated in 2020 with the weekly RSI recording its best level in January and a lower high as a new price high was recorded in September. This negative divergence suggests the Nasdaq 100 is likely to decline after any near term bounce.
As noted from its high on September 2 the S&P 500 fell 278 points from 3588 to 3310. A 50% retracement would allow the S&P 500 to rally to 3445 and a push up to 3480 – 3500 would retrace 61.8% of the drop. If the initial decline was Wave A of a larger corrective A-B-C, the rebound would represent Wave B and provide guidance in terms of a target for Wave C.
If the S&P 500 does mange to reach 3480 -3500, an equal 278 point decline would establish 3200 – 3220 as a target. If the S&P 500 only gets up to 3445, an equal decline for Wave C suggest the S&P 500 could fall to 3170.
In the August 31 WTR I suggested that if the S&P 500 rallied to 3525 it would be a good place to sell:
“The black trend line connecting the January 2018 high with the February peak comes in just above 3500 near 3525 and should be a good place to sell.”
The overall technical picture suggests it’s too early to buy.
Dollar
The Dollar index has been basing since its initial low on July 31. On August 31 the Dollar recorded its low and has rebounded. The chart pattern appears to be a developing inverse head & shoulders which is a bottoming formation. The neckline (horizontal trend line) is near 93.50 and a close above this trend line would constitute a breakout. The width of the formation is 1.75 points (93.50 – 91.75). A close above 93.50 would suggest a quick move up to 95.25 or higher.
Longer term the expectation is that the Dollar index could rally up to 97.50. The Dollar topped on March 23 which is the same day the S&P 500 bottomed. The implication is that a rally in the Dollar would likely contribute and coincide with a correction in the S&P 500.
Gold
Gold turned higher on March 20 one day before the Dollar topped and rallied as the Dollar fell from 102.99 on March 23 to its initial low on July 31. As the Dollar began its basing process, Gold topped on August 7 and has been consolidating ever since. It has tested $1900 – $1920 5 or 6 times after spiking down to $1869 on August 14. The area of support just above $1900 will lead to stop loss orders accumulating under $1900. If Gold falls below $1890 stop loss selling could lead to a sharp decline that takes out the low of $1869. If the Dollar rallies this decline in Gold is likely.
Silver
The pattern in Silver is a mirror image of Gold as it bottomed a few days before the high in the Dollar on March 23 and then peaked on August 7. Stop loss orders have likely accumulated under $26.00 since Silver has tested $26.00 – $26.20 a number of times. A close below $26.00 should trigger stops and lead to a quick drop to $24.00 and could possibly near $22.00.
The Dollar is expected to experience another decline that could result in a fall below 89.00 and near the February 2018 low of 88.25 in 2021, once the near term rally to 97.50 is over. If this is correct the coming decline in Gold and Silver represent a buying opportunity.
Treasury yields
The 10-year Treasury yield has been holding below 0.75% since April 7, other than a 4 day period. Clearly, the next time the 10-year closes above 0.75% it will mean something. A breakout could trip up the stock market since the market’s valuation is high based on a low 10-year Treasury yield.
The pattern in the 30-year Treasury yield is a bit different than the 10-year. A close above 1.55% would break the green and black down trend lines and represent a breakout.
A close below $161.00 on TLT would represent a sell signal and likely confirm that the 4 year cycle had turned up. A decline to under $150.00 would likely follow quickly. If TLT does close below $161.00 going short Treasury bonds via an ETF i.e. TBF is recommended.
Tactical U.S. Sector Rotation Model Portfolio: Relative Strength Ranking
The MTI generated a Bear Market Rally (BMR) buy signal when it crossed above the red moving average on April 16 when the S&P 500 closed at 2800. A new bull market was confirmed on June 4 when the WTI rose above the green horizontal line. Although the MTI has confirmed the probability of a bull market, it doesn’t preclude a correction. The expectation is that the S&P 500 may decline to 3200 and potentially to 2950 – 3000.
This is an expanded list of ETFs based on their relative strength to the S&P 500.
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